10 Most Tax-Friendly States for Retirees

Realtors will say “It’s all about location!” But taxation could have a much bigger impact on your retirement.

African American Woman Joyfully Receiving Flowers

by the Editors of Kiplinger’s Personal Finance magazine

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Updated November 2017

These 10 states impose the lowest taxes on retirees, according to Kiplinger’s 2017 analysis of state taxes. All of them exempt Social Security benefits from state taxes. Most exempt at least a portion of other retirement income, such as pensions and withdrawals from tax-deferred retirement plans. Most also have low property taxes. That’s important, because tax proposals by Republican lawmakers to eliminate or cap the property-tax deduction would effectively increase the tax rate for taxpayers who itemize.

For 2017, we prepared a sample tax return for a hypothetical couple with income from Social Security, a private pension, $5,000 in dividends, and a required minimum withdrawal from an individual retirement account.

Take a look at the most tax-friendly states for retirees. We list the best last.

#10. Georgia

State Income Tax: 1% (on the first $750 of taxable net income for single filers/$1,000 for joint filers) — 6% (on taxable income over $7,000 for single filers/$10,000 for joint filers)
Average State and Local Sales Tax: 7.01%
Estate Tax/Inheritance Tax: No/No

Ever wonder why so many retirees have Georgia on their minds? The Peach State’s low tax climate may have something to do with it. Social Security income is exempt from state taxes, and so is up to $35,000 of most types of retirement income for those age 62 to 64. (For those 65 and older, the exemption is $65,000 per taxpayer, or $130,000 per couple.) Retirement income includes pensions and annuities, interest, dividends, net income from rental property, capital gains, royalties, pensions, annuities, and the first $4,000 of earned income, such as wages.

The statewide sales tax is 4%, but jurisdictions can add up to 4% of their own taxes. The average combined state and local sales tax rate is 7.01%. Food and prescription drugs are exempt.

The median property tax on the state’s median home value of $148,100 is $1,397. Individuals age 65 and older can claim an exemption.

#9. Kentucky

State Income Tax: 2% (on less than $3,000 of taxable income) -- 6% (on more than $75,000 of taxable income)
Average State and Local Sales Tax: 6%
Estate Tax/Inheritance Tax: No/No

The Bluegrass State exempts Social Security benefits from state income taxes, plus up to $41,110 per person of a wide variety of retirement income.

Kentucky’s retirement-income exclusion includes distributions from IRAs and 401(k)s as well as private pensions and annuities. There is an additional exclusion for qualified military, civil-service, and state and local government pensions.

Kentucky has a homestead exemption on the assessed value of a qualifying single-unit residential property, which is adjusted every two years according to the cost-of-living index. The median property tax on Kentucky's median home value of $123,200 is $1,042, about average for the U.S.

For homeowners 65 and older or totally disabled, $37,600 of the assessed value of their property is exempt from state taxes under the homestead provision for 2017-2018.

Kentucky has an inheritance tax, but all Class A beneficiaries (spouse, parent, child, grandchild, brother and sister) are exempt. Other beneficiaries are subject to inheritance tax rates ranging from 4% to 16%.

#8. New Hampshire

State Income Tax: None
Average State and Local Sales Tax: None
Estate Tax/Inheritance Tax: No/No

Residents of the Granite State pay no taxes on Social Security benefits, pensions or distributions from their retirement plans. There’s no sales tax, either, so you can shop to your heart’s content.

New Hampshire imposes a 5% tax on dividend interest; a $1,200 exemption is available for residents 65 or older. It also depends more on property taxes for revenue than most states. The median property tax on New Hampshire's median home value of $237,300 is $5,100, the third-highest in the U.S.

An exemption for property taxes is available to those age 65 and older who have lived in New Hampshire for at least five years. Towns and cities set additional eligibility rules, but the minimum exemption is $5,000 off the assessed home value.

#7. Nevada

State Income Tax: None
Average State and Local Sales Tax: 7.98%
Estate Tax/Inheritance Tax: No/No

The Silver State offers retirees a jackpot of tax savings. There is no state income tax, so you can cash in your retirement plans without worrying about a big state tax bill.

Food and prescription drugs are exempt from the state’s 6.87% sales tax, but counties may tack on up to 1.3%. The average combined state and local sales tax rate is 7.98%. In addition to sales taxes, vehicle owners are charged an annual “government services tax” that’s based on the vehicle’s value and age.

The median property tax on the state’s median home value of $173,700 is $1,481. The state offers no property tax breaks for seniors.

#6. Pennsylvania

State Income Tax: 3.07%
Average State and Local Sales Tax: 6.34%
Estate Tax/Inheritance Tax: No/Yes

Pennsylvania’s tax rate is irrelevant to most retirees, because the state exempts most retirement income from state taxes. Social Security benefits, public and private pensions, and distributions from IRAs and 401(k) plans are tax-free.

Food, clothing and prescription and non-prescription drugs are exempt from sales taxes.

Itemizers beware: Losing the property tax deduction could sting, particularly in some high-cost areas of the state. Median property tax on the median home value of $166,000 is $2,533, 13th-highest in the U.S.

Pennsylvania’s inheritance tax is calculated as a percentage of the value of the estate transferred to beneficiaries. The amount is determined based on the relationship of the heir to the decedent and the decedent's date of death. The tax rate is 4.5% for transfers to direct descendants (lineal heirs), 12% for transfers to siblings and 15% for transfers to other heirs (except charitable organizations, exempt institutions and government entities). Property a husband and wife own jointly is exempt from the tax, and so is property inherited from a spouse or from a child 21 or younger by a parent. If the inheritance tax is paid within three months of the decedent's death, a 5% discount may apply. There is no state estate tax.

#5. Florida

State Income Tax: None
Average State and Local Sales Tax: 6.66%
Estate Tax/Inheritance Tax: No/No

The Sunshine State is very popular with retirees, not just because of its forgiving climate but also because it has no state income tax. Sales taxes, though, can go as high as 7.5%, depending on where you live. The average combined state and local tax rate is 6.66%.

Median property tax on median home value of $159,000 is $1,686, slightly below average for the U.S. Residents are eligible for a homestead exemption of up to $50,000. Some city and county governments give residents age 65 and older who meet certain income limits an additional homestead exemption of up to $50,000.

#4. Mississippi

State Income Tax: 3% (on less than $5,000 of taxable income) - 5% (on more than $10,000 of taxable income)
Average State and Local Sales Tax: 7.07%
Estate Tax/Inheritance Tax: No/No

The tea is sweet in the Magnolia State, and so is the income tax environment for retirees. Mississippi not only exempts Social Security benefits from state income tax, it also excludes withdrawals from IRAs and 401(k) plans, income from public and private pensions and other types of qualified retirement income.

Mississippi’s state sales tax rate of 7% is the second-highest in the U.S. (only California, at 7.5%, is higher), and Mississippi is one of a minority of states that charges sales tax on groceries. But prescription drugs, residential utilities, motor fuel and newspapers are all exempt, and localities add very little on top of the state’s rate, if anything.

Vehicle sales are taxed at 5%, two percentage points below the general sales tax rate. Mississippi also charges an annual personal property tax based on vehicles’ age and value. Median property tax on the median home value of $103,100 is $813, below average for the U.S.

#3. South Dakota

State Income Tax: None
Average State and Local Sales Tax: 5.84%
Estate Tax/Inheritance Tax: No/No

The Mount Rushmore State offers a friendly tax environment for retirees. There is no state income tax, so Social Security benefits and other forms of retirement income get a free ride.

Sales taxes are relatively low, although they cover a broad scope of services. The average combined state and local sales tax rate is 5.84%.

Median property tax on the median home value of $140,500 is $1,879, the 16th-highest rate in the U.S.

#2. Alaska

State Income Tax: None
Average State and Local Sales Tax: 1.78%
Estate Tax/Inheritance Tax: No/No

Alaska is a true tax haven for retirees (or anyone else who doesn’t mind wearing mittens in June). Alaskans pay no state income tax, so Social Security benefits, retirement plan withdrawals and gains from your investments won’t be nicked by state taxes. Alaska has no state sales tax, either, and Anchorage and Fairbanks, two of the state’s largest cities, impose no local sales tax.

In addition, the state sends all permanent residents (who have lived there for at least one year) an annual dividend check from the state’s oil wealth savings account. However, declining oil revenues have reduced this windfall: this year, each legal resident received $1,100, down from a peak of $2,072 in 2015.

Median property tax on a median home value of $250,000 is $2,956. That’s in the costlier half of U.S. property tax rates overall but not confiscatory. Homeowners 65 and older (or surviving spouses 60 and older) are exempt from municipal taxes on the first $150,000 of assessed value of their property.

#1. Wyoming

State Income Tax: None
Average State and Local Sales Tax: 5.42%
Estate Tax/Inheritance Tax: No/No

The Equality State is tax-friendly to all residents, especially retirees. There is no income tax, and sales taxes are low. Thanks to abundant revenues that the state collects from oil and mineral rights, Wyoming residents shoulder one of the lowest tax burdens in the U.S., according to the Tax Foundation.

You won’t pay high property taxes to own a home on the range, either. The median property tax on the state’s median home value of $194,800 is $1,196, the ninth-lowest in the U.S. Even better for seniors, those who meet income requirements are eligible for a refund of up to $900 ($800 for single filers) of property taxes, utilities and sales/use taxes.

About our Methodology

To create our rankings, we evaluated data and state tax-policy details from a wide range of sources.

Income Taxes

We looked at each state's tax agency, plus this helpful document from the Tax Foundation. To better capture the effect of retirement tax breaks, we prepared tax returns in each state for a hypothetical couple with this profile:

  • Social Security: $24,000 for the primary filer, $12,000 for the spouse
  • A required minimum withdrawal from an IRA of $39,063
  • For the primary filer: A $24,000 private pension
  • Plus: $5,000 in taxable dividends
  • They took the standard deduction

This allowed us to see what income was sheltered from tax, as well as what the final tax bill was. Some states that make minimal concessions to retirees end up being tax-favorable destinations anyway, as their rates are low. In other cases, tax breaks for retirees ended up lowering taxable income substantially, so that some traditionally "high tax" states only took a modest bite.

Property Tax

Median income tax paid and median home values come from U.S. Census' American Community Survey and are 2015 data.

Sales Taxes

We also cite the Tax Foundation's figure for average sales tax, which is a population-weighted average of local sales taxes. In states that let municipalities add sales taxes, this gives an estimate of what most people in a given state actually pay, as those rates can vary widely.

Inheritance & Gift Taxes

Each state's tax agency.

 

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